Brazil is ramping up IT investment to boost its ailing economy

Dogged by years of economic upheaval, Brazil is betting on the IT sector to help return the economy to growth and stability.

In March the federal government welcomed a $200 million joint investment with chipmaker Qualcomm to build a new semiconductor factory in the country. ASE Group is also part of the memorandum backing the investment.

Specifics on the where and when of the factory are thin. It will be located in Campinas in the state São Paulo, where other tech giants like Samsung and Lenovo are operating but there are no details on when the factory will be opened.

The investment is the first step in Brazil’s path to be a significant player in the manufacture of high density semiconductors for use in 4G and eventually 5G devices as well as IoT applications.

“Our participation in this memorandum has two important meanings: it contributes to the expansion and development of telecommunications technologies in Brazil,” said Minister of Science, Technology Innovation and Communications, Gilberto Kassab, “and also takes place at an important time as the country returns to growth and attracts investment.”

A recovery hinging on outside forces

“The revival in the broader economy is dependent on foreign investments, as the government’s efforts to shore up fiscal balances by austerity measures are meeting a lot of resistance locally,” says Nikhil Salvi of global research and advisory firm, Aranca.

“The technology sector can become an important contributor to foreign investments due to [the] attractiveness of Brazil as an important consumer destination with nearly 250 million mobile subscribers and growing usage of electronic devices. Brazil, as one of the largest economies in Latin America, is also attractive as a regional hub.”

Qualcomm’s investment is expected to add around 1,200 job, Salvi says, which is a drop in the ocean when you consider that Brazil’s unemployment rate is over 11%.

“Overall, by itself the Qualcomm investment contributes only marginally to investment and job creation, but the technology sector does have the momentum to increase its contribution to [the] Brazilian economy and support it during its recovery phase.”

The government also recently put pen to paper with Ericsson to develop a centre for IoT security. The plan for the centre involves collaborating with other companies, startups, and researchers. Ericsson had previously committed to Brazil by carrying out 5G testing there with Mexican telco América Móvil.

French IT consultancy Capgemini opened its first Latin American innovation centre in São Paulo in March after it invested $3.6 million in a local data centre last year. It’s all part of a growing focus for the firm in the region, after it appointed a new Brazilian head of operations in late 2016. The new innovation centre will be focused on developing proof-of-concepts in areas like IoT, AI, and cybersecurity.

Under new president, Michel Temer, who took office after the impeachment of Dilma Rousseff, the Brazilian government will clock these events as big wins. Finance Minister Henrique Meirelles claims that the economy has “clearly started to grow again”, also pointing to growing auto sales, while in March the economy added jobs for the first time in two years. However, despite these seemingly positive developments, a report from Bloomberg showed that GDP contracted again at the end of 2016.

Local players are catching up

Brazil’s traditional sectors have taken a beating. Most recently the country’s meat scandal resulted in another black eye for its economy.

It’s easy to see why Brazil is looking for outside forces to help bolster its IT sector, which has in fact been growing in the face of declines elsewhere, but not without hiccups and road bumps. For example, in 2016 Brazilian IT distributors saw a 9% decline in sales.

Tech startups in the country, though namely in the metropolises of São Paulo and Rio de Janeiro, have had to look for outside help when it comes to VCs.

But there are local VCs investing in local startups like São Paulo’s Vox Capital investing around $1.2 million in edtech startup Aondê Educacional in March. These are comparatively small sums when put up against the VC money for startups that’s sloshing around in Europe and the US but there’s a steady flow of deal-making and more to come it appears. DOMO Invest, a Brazilian VC firm, recently closed its R$100 million ($30 million) investment fund which will invest in up to 20 Brazilian startups at the seed stage.

Fintech company Nubank, has become the darling of Brazil’s tech scene, attracting investment from big names like Sequoia Capital and Tiger Global Management as well as local firm Redpoint eventures, leading to a valuation of $80 million.

There is more that the government can do to stimulate startups and investments, says Andersons Thees, partner at Redpoint.

“Historically, the Brazilian government has caused more harm than good every time it’s tried,” he says. “But recently, we’ve begun to see a new trend emerging, with a better understanding of how things work in the startup ecosystem.”

Thees points to efforts on a municipal level to make it easier to open and close a company.

“On a federal level, there are discussions around new and better labour and tax laws, which will benefit companies in general, but have a critical impact for the startups,” he adds, going on to say that there is a lot of “goodwill and professionalism” among regulators and public agencies to improve the ecosystem.

“There surely is a lot that can still be improved on, but the most recent trend is a positive one.”

Brazil along with Mexico have become, by far, the two biggest markets for tech in Latin America but whether or not this will salvage Brazil’s fragile economy in the long term remains to be seen.